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Sat, 03 Oct 2015 15:22:18 +0100Sat, 03 Oct 2015 15:22:18 +0100Anticipation, tax avoidance, and the price elasticity of gasoline demandhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37099
Traditional least squares estimates of the responsiveness of gasoline consumption to changes in gasoline prices are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. We provide evidence that gasoline buyers increase gasoline purchases before tax increases and delay gasoline purchases before tax decreases. This intertemporal substitution renders the tax instrument endogenous, invalidating conventional IV analysis. We show that including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower and more plausible elasticity estimates. Our analysis has implications more broadly for the IV analysis of markets in which buyers may store purchases for future consumption.John M. Coglianese; Lucas W. Davis; Lutz Kilian; James H. Stockworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37099Tue, 10 Mar 2015 15:22:18 +0100Understanding the decline in the price of oil since june 2014http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36848
Some observers have conjectured that oil supply shocks in the United States and in other countries are behind the plunge in the price of oil since June 2014. Others have suggested that a major shock to oil price expectations occurred when in late November 2014 OPEC announced that it would maintain current production levels despite the steady increase in non-OPEC oil production. Both conjectures are perfectly reasonable ex ante, yet we provide quantitative evidence that neither explanation appears supported by the data. We show that more than half of the decline in the price of oil was predictable in real time as of June 2014 and therefore must have reflected the cumulative effects of earlier oil demand and supply shocks. Among the shocks that occurred after June 2014, the most influential shock resembles a negative shock to the demand for oil associated with a weakening economy in December 2014. In contrast, there is no evidence of any large positive oil supply shocks between June and December. We conclude that the difference in the evolution of the price of oil, which declined by 44% over this period, compared with other commodity prices, which on average only declined by about 5%-15%, reflects oil-market specific developments that took place prior to June 2014.Christiane Baumeister; Lutz Kilianworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36848Wed, 11 Feb 2015 11:17:46 +0100How risky is college investment?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37016
This paper is motivated by the fact that nearly half of U.S. college students drop out without earning a bachelor’s degree. Its objective is to quantify how much uncertainty college entrants face about their graduation outcomes. To do so, we develop a quantitative model of college choice. The innovation is to model in detail how students progress towards a college degree. The model is calibrated using transcript and financial data. We find that more than half of college entrants can predict whether they will graduate with at least 80% probability. As a result, stylized policies that insure students against the financial risks associated with uncertain graduation have little value for the majority of college entrants.Lutz Hendricks; Oksana Leukhinaworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37016Wed, 11 Feb 2015 11:09:28 +0100The economic crisis and medical care usagehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36854
We use a unique, nationally representative cross-national dataset to document the reduction in individuals’ usage of routine non-emergency medical care in the midst of the economic crisis. A substantially larger fraction of Americans have reduced medical care than have individuals in Great Britain, Canada, France, and Germany, all countries with universal health care systems. At the national level, reductions in medical care are related to the degree to which individuals must pay for it, and within countries are strongly associated with exogenous shocks to wealth and employment.Annamaria Lusardi; Daniel Schneider; Peter Tufanoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36854Fri, 06 Feb 2015 11:30:42 +0100Inside the crystal ball: new approaches to predicting the gasoline price at the pumphttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36381
Although there is much interest in the future retail price of gasoline among consumers, industry analysts, and policymakers, it is widely believed that changes in the price of gasoline are essentially unforecastable given publicly available information. We explore a range of new forecasting approaches for the retail price of gasoline and compare their accuracy with the no-change forecast. Our key finding is that substantial reductions in the mean-squared prediction error (MSPE) of gasoline price forecasts are feasible in real time at horizons up to two years, as are substantial increases in directional accuracy. The most accurate individual model is a VAR(1) model for real retail gasoline and Brent crude oil prices. Even greater reductions in MSPEs are possible by constructing a pooled forecast that assigns equal weight to five of the most successful forecasting models. Pooled forecasts have lower MSPE than the EIA gasoline price forecasts and the gasoline price expectations in the Michigan Survey of Consumers. We also show that as much as 39% of the decline in gas prices between June and December 2014 was predictable.Christiane Baumeister; Lutz Kilian; Thomas K. Leeworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36381Wed, 21 Jan 2015 16:02:13 +0100The impact of the shale oil revolution on U.S. oil and gasoline prices
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36097
This article examines how the shale oil revolution has shaped the evolution of U.S. crude oil and gasoline prices. It puts the evolution of shale oil production into historical perspective, highlights uncertainties about future shale oil production, and cautions against the view that the U.S. may become the next Saudi Arabia. It then reviews the role of the ban on U.S. crude oil exports, of capacity constraints in refining and transporting crude oil, of differences in the quality of conventional and unconventional crude oil, and of the recent regional fragmentation of the global market for crude oil for the determination of U.S. oil and gasoline prices. It discusses the reasons for the persistent wedge between U.S. crude oil prices and global crude oil prices in recent years and for the fact that domestic oil prices below global levels need not translate to lower U.S. gasoline prices. It explains why the shale oil revolution unlike the shale gas revolution is unlikely to stimulate a boom in oil-intensive manufacturing industries. It also explores the implications of shale oil production for the transmission of oil price shocks to the U.S. economy.Lutz Kilianworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36097Mon, 15 Dec 2014 16:51:10 +0100Impulse response matching estimators for DSGE modelshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36055
One of the leading methods of estimating the structural parameters of DSGE models is the VAR-based impulse response matching estimator. The existing asympotic theory for this estimator does not cover situations in which the number of impulse response parameters exceeds the number of VAR model parameters. Situations in which this order condition is violated arise routinely in applied work. We establish the consistency of the impulse response matching estimator in this situation, we derive its asymptotic distribution, and we show how this distribution can be approximated by bootstrap methods. Our methods of inference remain asymptotically valid when the order condition is satisfied, regardless of whether the usual rank condition for the application of the delta method holds. Our analysis sheds new light on the choice of the weighting matrix and covers both weakly and strongly identified DSGE model parameters. We also show that under our assumptions special care is needed to ensure the asymptotic validity of Bayesian methods of inference. A simulation study suggests that the frequentist and Bayesian point and interval estimators we propose are reasonably accurate in finite samples. We also show that using these methods may affect the substantive conclusions in empirical work.Pablo Guerron-Quintana; Atsushi Inoue; Lutz Kilianworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36055Mon, 15 Dec 2014 16:42:57 +0100Human capital and optimal redistributionhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35611
We characterize optimal redistribution in a dynastic family model with human capital. We show how a government can improve the trade-off between equality and incentives by changing the amount of observable human capital. We provide an intuitive decomposition for the wedge between human-capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because human capital carries risk: its returns depend on the non-diversi able risk of children's ability. Thus, human capital investment is encouraged more than bequests in the social optimum if human capital is a bad hedge for consumption risk.Winfried Koeniger; Julien Pratworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35611Tue, 25 Nov 2014 12:53:39 +0100Money is more than memoryhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35610
Impersonal exchange is the hallmark of an advanced society. One key institution for impersonal exchange is money, which economic theory considers just a primitive arrangement for monitoring past conduct in society. If so, then a public record of past actions — or memory — supersedes the function performed by money. This intriguing theoretical postulate remains untested. In an experiment, we show that the suggested functional equality between money and memory does not translate into an empirical equivalence. Monetary systems perform a richer set of functions than just revealing past behaviors, which proves to be crucial in promoting large-scale cooperation.Maria Bigoni; Gabriele Camera; Marco Casariworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35610Tue, 25 Nov 2014 12:49:41 +0100Emotions-at-risk: an experimental investigation into emotions, option prices and risk perceptionhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35609
This paper experimentally investigates how emotions are associated with option prices and risk perception. Using a binary lottery, we find evidence that the emotion ‘surprise’ plays a significant role in the negative correlation between lottery returns and estimates of the price of a put option. Our findings shed new light on various existing theories on emotions and affect. We find gratitude, admiration, and joy to be positively associated with risk perception, although the affect heuristic predicts a negative association. In contrast with the predictions of the appraisal tendency framework (ATF), we document a negative correlation between option price and surprise for lottery winners. Finally, the results show that the option price is not associated with risk perception as commonly used in psychology.Ronald Bosman; Roman Kräussl; Thomas van Galenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35609Tue, 25 Nov 2014 12:39:03 +0100Art as an alternative asset class: risk and return characteristics of the Middle Eastern & Northern African art marketshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35608
This chapter analyzes the risk and return characteristics of investments in artists from the Middle East and Northern Africa (MENA) region over the sample period 2000 to 2012. With hedonic regression modeling we create an annual index that is based on 3,544 paintings created by 663 MENA artists. Our empirical results prove that investing in such a hypothetical index provides strong financial returns. While the results show an exponential growth in sales since 2006, the geometric annual return of the MENA art index is a stable13.9 percent over the whole period. We conclude that investing in MENA paintings would have been profitable but also note that we examined the performance of an emerging art market that has only seen an upward trend without any correction, yet.Roman Kräusslworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35608Tue, 25 Nov 2014 12:33:41 +0100Is there a bubble in the art market?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35581
Roman Kräussl; Thorsten Lehnert; Nicolas Martelinworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35581Tue, 25 Nov 2014 12:25:50 +0100News media sentiment and investor behaviorhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35580
This paper investigates the impact of news media sentiment on financial market returns and volatility in the long-term. We hypothesize that the way the media formulate and present news to the public produces different perceptions and, thus, incurs different investor behavior. To analyze such framing effects we distinguish between optimistic and pessimistic news frames. We construct a monthly media sentiment indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and/or the lead paragraph. Our results indicate that pessimistic news media sentiment is positively related to global market volatility and negatively related to global market returns 12 to 24 months in advance. We show that our media sentiment indicator reflects very well the financial market crises and pricing bubbles over the past 20 years.
Roman Kräussl; Elizaveta Mirgorodskayaworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35580Tue, 25 Nov 2014 12:15:59 +0100The broken buck stops here: embracing sponsor support in money market fund reformhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35574
Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis because widespread redemption demands during the days following the Lehman bankruptcy contributed to a freeze in the credit markets. In response, MMFs were deemed a component of the nefarious shadow banking industry and targeted for regulatory reform. The Securities and Exchange Commission’s (SEC) misguided 2014 reforms responded by potentially exacerbating MMF fragility while potentially crippling large segments of the MMF industry.
Determining the appropriate approach to MMF reform has been difficult. Banks regulators supported requiring MMFs to trade at a floating net asset value (NAV) rather than a stable $1 share price. By definition, a floating NAV prevents MMFs from breaking the buck but is unlikely to eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, the SEC’s reforms may substantially reduce the utility of MMFs for many investors, which could, in turn, affect the availability of short term credit.
The shape of MMF reform has been influenced by a turf war among regulators as the SEC has battled with bank regulators both about the need for additional reforms and about the structure and timing of those reforms. Bank regulators have been influential in shaping the terms of the debate by using banking rhetoric to frame the narrative of MMF fragility. This rhetoric masks a critical difference between banks and MMFs – asset segregation. Unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. This difference has caused the SEC to mistake sponsor support as a weakness rather than a key stability-enhancing feature. As a result, the SEC mistakenly adopted reforms that burden sponsor support instead of encouraging it.
As this article explains, required sponsor support offers a novel and simple regulatory solution to MMF fragility. Accordingly this article proposes that the SEC require MMF sponsors explicitly to guarantee the $1 share price. Taking sponsor support out of the shadows embraces rather than ignores the advantage that MMFs offer over banks through asset partitioning. At the same time, sponsor support harnesses market discipline as a constraint against MMF risk-taking and moral hazard.Jill E. Fischworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35574Tue, 25 Nov 2014 12:07:53 +0100How does tax progressivity and household heterogeneity affect laffer curves?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35571
How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.Hans Aasnes Holter; Dirk Krueger; Serhiy Stepanchukworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35571Tue, 25 Nov 2014 11:18:29 +0100Fitting parsimonious household-portfolio models to datahttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34371
US data and new stockholding data from fifteen European countries and China exhibit a common pattern: stockholding shares increase in household income and wealth. Yet, there is a multitude of numbers to match through models. Using a single utility function across households (parsimony), we suggest a strategy for fitting stockholding numbers, while replicating that saving rates increase in wealth, too. The key is introducing subsistence consumption to an Epstein-Zin-Weil utility function, creating endogenous risk-aversion differences across rich and poor. A closed-form solution for the model with insurable labor-income risk serves as calibration guide for numerical simulations with uninsurable labor-income risk.Sylwia Hubar; Christos Koulovatianos; Jian Liworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34371Tue, 25 Nov 2014 10:59:47 +0100The impact of health insurance on stockholding: a regression discontinuity approachhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35366
Using data from the US Health and Retirement Study, we study the causal effect of increased health insurance coverage through Medicare and the associated reduction in health-related background risk on financial risk-taking. Given the onset of Medicare at age 65, we identify our effect of interest using a regression discontinuity approach. We find that getting Medicare coverage induces stockholding for those with at least some college education, but not for their less-educated counterparts. Hence, our results indicate that a reduction in background risk induces financial risk-taking in individuals for whom informational and pecuniary stock market participation costs are relatively low.Dimitris Christelis; Dimitris Georgarakos; Anna Sanz-de-Galdeanoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35366Tue, 11 Nov 2014 16:55:25 +0100The return to college: selection and dropout riskhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35310
This paper studies the effect of graduating from college on lifetime earnings. We develop a quantitative model of college choice with uncertain graduation. Departing from much of the literature, we model in detail how students progress through college. This allows us to parameterize the model using transcript data. College transcripts reveal substantial and persistent heterogeneity in students’ credit accumulation rates that are strongly related to graduation outcomes. From this data, the model infers a large ability gap between college graduates and high school graduates that accounts for 54% of the college lifetime earnings premium.Lutz Hendricks; Oksana Leukhinaworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35310Mon, 03 Nov 2014 16:31:48 +0100Lessons from the european financial crisishttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35309
his paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks’ sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area “banking union” can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks’ risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks’ capital shortfall, such as book and market leverage ratios.Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35309Mon, 03 Nov 2014 16:24:36 +0100Financial disclosure and market transparency with costly information processing
http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35308
We study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. As a consequence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient.Marco Di Maggio; Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35308Mon, 03 Nov 2014 16:17:57 +0100Do demographics prevent consumer aggregates from reflecting micro-level preferences?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35307
Most simulated micro-founded macro models use solely consumer-demand aggregates in order to estimate deep economy-wide preference parameters, which are useful for policy evaluation. The underlying demand-aggregation properties that this approach requires, should be easy to empirically disprove: since household-consumption choices differ for households with more members, aggregation can be rejected if appropriate data violate an affine equation regarding how much individuals benefit from within-household sharing of goods. We develop a survey method that tests the validity of this equation, without utility-estimation restrictions via models. Surprisingly, in six countries, this equation is not rejected, lending support to using consumer-demand aggregates.Christos Koulovatianos; Carsten Schröder; Ulrich Schmidtworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35307Mon, 03 Nov 2014 16:06:59 +0100A note on uniqueness in game-theoretic foundations of the reactive equilibriumhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35306
Riley (1979)'s reactive equilibrium concept addresses problems of equilibrium existence in competitive markets with adverse selection. The game-theoretic interpretation of the reactive equilibrium concept in Engers and Fernandez (1987) yields the Rothschild-Stiglitz (1976)/Riley (1979) allocation as an equilibrium allocation, however multiplicity of equilibrium emerges. In this note we imbed the reactive equilibrium's logic in a dynamic market context with active consumers. We show that the Riley/Rothschild-Stiglitz contracts constitute the unique equilibrium allocation in any pure strategy subgame perfect Nash equilibrium.Wanda Mimra; Achim Wambachworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35306Mon, 03 Nov 2014 15:59:22 +0100Advertising arbitragehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35124
Speculators often advertise arbitrage opportunities in order to persuade other investors and thus accelerate the correction of mispricing. We show that in order to minimize the risk and the cost of arbitrage an investor who identifies several mispriced assets optimally advertises only one of them, and overweights it in his portfolio; a risk-neutral arbitrageur invests only in this asset. The choice of the asset to be advertised depends not only on mispricing but also on its "advertisability" and accuracy of future news about it. When several arbitrageurs identify the same arbitrage opportunities, their decisions are strategic complements: they invest in the same asset and advertise it. Then, multiple equilibria may arise, some of which inefficient: arbitrageurs may correct small mispricings while failing to eliminate large ones. Finally, prices react more strongly to the ads of arbitrageurs with a successful track record, and reputation-building induces high-skill arbitrageurs to advertise more than others.Sergei Kovbasyuk; Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35124Mon, 20 Oct 2014 16:00:17 +0200Dealing with financial crises: how much help from research?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35123
Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.Marco Paganoworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35123Mon, 20 Oct 2014 15:50:46 +0200Consumption-based asset pricing with rare disaster risk : a simulated method of moments approachhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35114
The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensation for unlikely but calamitous risks that they happened not to incur. Although convincing in theory, empirical tests of the rare disaster explanation are scarce. We estimate a disaster-including consumption-based asset pricing model (CBM) using a combination of the simulated method of moments and bootstrapping. We consider several methodological alternatives that differ in the moment matches and the way to account for disasters in the simulated consumption growth and return series. Whichever specification is used, the estimated preference parameters are of an economically plausible size, and the estimation precision is much higher than in previous studies that use the canonical CBM. Our results thus provide empirical support for the rare disaster hypothesis, and help reconcile the nexus between real economy and financial markets implied by the consumption-based asset pricing paradigm.Joachim Grammig; Jantje Soenksenworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35114Mon, 20 Oct 2014 15:42:46 +0200